Taxpayers/Schools Could See Windfall From Predicted Budget Surplus

Sacramento, CA – Taxpayers and schools may come out as the big winners if a projected over $30 billion in tax revenue pans out next year.

A new forecast from the state’s independent Legislative Analyst’s Office (LAO) predicts California will have a $31 billion budget surplus next year as revenues continue to climb despite the coronavirus pandemic. The substantial number has the office estimating that California will surpass a constitutional limit on state spending by more than $14 billion. That would require state lawmakers to either cut taxes, spend more money on schools and infrastructure or give rebates to taxpayers.

California businesses reported a record-high $216.8 billion in taxable sales from April through June of this year. That is a 38.8% increase over the same period in 2020 and a 17.4% increase over those months in pre-pandemic 2019. With the state “budget year” running from July 1 to June 30, the first three months saw tax collections more than $10 billion ahead of projections. The LAO foresees that by June of 2022, California will have collected $28 billion more in taxes and transfers than they had expected. That could mean a significant increase of about $11 billion in spending on public schools, as the state Constitution requires lawmakers to spend about 40% of state tax revenues on public education each year.

The historic surge comes from taxes on income, sales and corporations, which were 40% higher this September than last year and almost 60% higher than September 2019. The growth is attributed to retail sales that saw double digit-growth this year and stock prices doublings from their low point last spring at the start of the pandemic.

Noting it is “impossible” to know whether these gains are sustainable, the LAO points to inflation as a key factor. New data from the U.S. Census Bureau shows that the nationwide growth in retail sales of 1.7% in October was mostly because prices rose 0.9% during that same time period while gas prices grew even faster. Many economic forecasters predict inflation will slow down by next year, but the Legislative Analyst’s Office conceded that prediction “comes with significant uncertainty.”

“Recognizing this, our main revenue forecast takes a middle ground of possibilities, assuming neither that the gains are entirely sustainable nor that they are entirely unsustainable,” the LAO wrote in its annual Fiscal Outlook.

The LAO also cautioned that the surplus could also be as low as $10 billion or as high as $60 billion depending on those tax collections. They added that if the numbers hold, the state’s main savings account could have as much as $21 billion, or about 10% of all general fund revenues and transfers.